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In a recent decision, the Alberta Court of Queen’s Bench recognized midstream operators’ need for prompt payment from gas producers, when it gave effect to 30-day payment clauses in gas processing and contract operating service agreements. In doing so, the Court affirmed of the common “pay first, audit later” arrangement and recognized the importance of this kind of arrangement in assuring a reliable cash flow for midstream operators. This decision, SemCAMS ULC v Blaze Energy Ltd. 2015 ABQB 218 (“SemCAMS”) will be important for many industry players seeking to enforce payment terms in their agreements.

Background

In SemCAMS, SemCAMS ULC asked for summary judgement against Blaze Energy Ltd (“Blaze”) for amounts owing on six agreements including agreements for the processing and transportation of gas (the “Agreements”). SemCAMS ULC provided services to Blaze under the Agreements and issued monthly invoices to Blaze. Blaze did not pay as required, and SemCAMS ULC sued.

As is common in the industry, the Agreements required Blaze to pay bills within 30 days of receiving them. Some provided Blaze had no right to withhold amounts in dispute and others allowed SemCAMS ULC to sue on its invoices and be paid immediately. Blaze had audit rights under the Agreements, but, as the Court ultimately held, its audit rights did not change its obligation to pay within 30 days. The Agreements amounted to a “pay first, audit later” arrangement, where the party receiving services is required to pay immediately, with an adjustment later if an audit turns up an overbilling.

The Decision

Ultimately, Justice Strekaf ordered Blaze to pay SemCAMS ULC the amounts invoiced, even though Blaze disputed the amounts owing and had initiated audits under the agreements. Justice Strekaf noted that, in other cases, the party seeking payment would not be able to get summary judgment where the amounts actually owing under the agreement were in dispute. However, because SemCAMS ULC and Blaze had agreed to allocate the risk that Blaze might pay amounts it didn’t owe, which would have to be refunded later, the Court respected their allocation. Although Blaze argued that this would be a commercially unreasonable result, Justice Strekaf disagreed, noting that, as an operator of a facility serving multiple customers, SemCAMS ULC needed “to be able to rely on a reliable cash flow.”

Implications

We note that similar “pay first, audit later” arrangements are present in other industry agreements, including the 1996 PASC Accounting Procedure (clauses 102, 104, 106, and 107) which is incorporated by reference into the 1990 and 2007 CAPL Operating Procedures. As such, although the specific words of each contract will govern, the SemCAMS case may have implications for many industry players. For producers contracting with midstream operators (or, joint interest owners in a joint operating agreement), SemCAMS suggests that an audit, or potentially another verification method, is not enough to suspend the obligation to pay invoices within the time specified by the agreement. For midstream producers (and operators under joint operating agreements), SemCAMS will likely make it easier to obtain judgment on delinquent invoices, regardless of any dispute over the actual amount owing.

In this time of depressed commodity prices, where ready access to cash will be important to many players’ industry participants SemCAMS helps provide some certainty over payments made under a standard industry arrangements. This means that parties to contracts may have to pay invoices even where there is a legitimate dispute, and will have to rely on audit and refund provisions as their remedy.

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